Trading Strategies
Wall Street 101
Reason for Publication
The stock market has never been more infulential as the world continues to battle with COVID-19. Stocks are the biggest fortune teller of where the wordl is and more importantly where the world is going. I figured as we enter 2021 that manipulated stocks would be a great way to identify what company in what sector is going to be the big winnder!
S&P 500
The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices.
The S&P 500 index is a capitalization-weighted index and the 10 largest companies in the index account for 26% of the market capitalization of the index. The 10 largest companies in the index, in order of weighting, are Apple Inc., Microsoft, Amazon.com, Facebook, Alphabet Inc. (class A & C), Berkshire Hathaway, Johnson & Johnson, JPMorgan Chase & Co. and Visa Inc., respectively.
Strategies
Quantitative Momentum Strategy
“Momentum investing” means investing in the stocks that have increased in price the most. For this project, we’re going to build an investing strategy that selects the 50 stocks with the highest price momentum. From there, we will calculate recommended trades for an equal-weight portfolio of these 50 stocks.
Reason for Strategy
Real-world quantitative investment firms differentiate between “high quality” and “low quality” momentum stocks:
- High-quality momentum stocks show “slow and steady” outperformance over long periods of time
- Low-quality momentum stocks might not show any momentum for a long time, and then surge upwards.
The reason why high-quality momentum stocks are preferred is because low-quality momentum can often be cause by short-term news that is unlikely to be repeated in the future (such as an FDA approval for a biotechnology company). To identify high-quality momentum, we’re going to build a strategy that selects stocks from the highest percentiles of:
- 1-month price returns
- 3-month price returns
- 6-month price returns
- 1-year price returns
We’ll now calculate our HQM Score, which is the high-quality momentum score that we’ll use to filter for stocks in this investing strategy.
The HQM Score will be the arithmetic mean of the 4 momentum percentile scores that we calculated in the last section.
Check out the full stategy in this link!
Quantitative Value Strategy
“Value investing” means investing in the stocks that are cheapest relative to common measures of business value (like earnings or assets). For this project, we’re going to build an investing strategy that selects the 50 stocks with the best value metrics. From there, we will calculate recommended trades for an equal-weight portfolio of these 50 stocks.
Reason for Strategy
Every valuation metric has certain flaws. For example, the price-to-earnings ratio doesn’t work well with stocks with negative earnings.Similarly, stocks that buyback their own shares are difficult to value using the price-to-book ratio.
Investors typically use a composite basket of valuation metrics to build robust quantitative value strategies. In this section, we will filter for stocks with the lowest percentiles on the following metrics:
- Price-to-earnings ratio
- Price-to-book ratio
- Price-to-sales ratio
- Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation, and - Amortization (EV/EBITDA)
- Enterprise Value divided by Gross Profit (EV/GP)
We’ll now calculate our RV Score (which stands for Robust Value), which is the value score that we’ll use to filter for stocks in this investing strategy.
The RV Score will be the arithmetic mean of the 5 percentile scores that we calculated in the last section.
Check out the full stategy in this link!
Top 5 Momentum Stocks
| Ticker | Price | Number of Shares to Buy | One-Year Price Return | One-Year Return Percentile | Six-Month Price Return | Six-Month Return Percentile | Three-Month Price Return | Three-Month Return Percentile | One-Month Price Return | One-Month Return Percentile | HQM Score |
|---|---|---|---|---|---|---|---|---|---|---|---|
| FCX | $26.76 | 7473 | 107.9% | 98.2% | 144.9% | 99.0% | 75.5% | 98.2% | 13.3% | 94.1% | 97.4% |
| ALGN | $550.18 | 363 | 93.6% | 97.4% | 99.5% | 98.2% | 65.0% | 97.6% | 10.3% | 89.5% | 95.7% |
| ALB | $152.16 | 1314 | 111.2% | 98.4% | 99.7% | 98.4% | 74.8% | 98.0% | 8.7% | 85.5% | 95.1% |
| SIVB | $398.87 | 501 | 55.9% | 92.3% | 88.2% | 97.4% | 63.5% | 96.2% | 8.6% | 85.0% | 92.7% |
| DIS | $185.55 | 1077 | 26.3% | 73.9% | 62.7% | 93.3% | 45.7% | 91.3% | 24.1% | 98.6% | 89.3% |
Top 5 Value Stocks
| Ticker | Price | Number of Shares to Buy | Price-to-Earnings Ratio | PE Percentile | Price-to-Book Ratio | PB Percentile | Price-to-Sales Ratio | PS Percentile | EV/EBITDA | EV/EBITDA Percentile | EV/GP | EV/GP Percentile | RV Score |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NOW | $569.72 | 351 | 160 | 98.0% | 45 | 96.8% | 28 | 99.6% | 223 | 99.8% | 34 | 99.6% | 98.8% |
| PAYC | $451.65 | 442 | 154 | 97.6% | 45 | 97.0% | 34 | 99.8% | 92 | 98.2% | 37 | 100.0% | 98.5% |
| ADSK | $301.45 | 663 | 162 | 98.4% | 986 | 100.0% | 19 | 97.3% | 98 | 99.0% | 19 | 92.9% | 97.5% |
| DXCM | $364.92 | 548 | 153 | 97.4% | 24 | 93.1% | 19 | 98.0% | 96 | 98.8% | 28 | 98.0% | 97.1% |
| AMD | $92.70 | 2157 | 127 | 96.6% | 29 | 95.4% | 13 | 94.7% | 75 | 97.4% | 29 | 98.4% | 96.5% |
Andrew D'Armond
Leveraging data science to achieve results